A Texas lawmaker who also operates a CPA practice has introduced a pair of bills in the Texas legislature that would exempt CPAs who prepare financial statements for small businesses from the state’s mandatory peer review program, and ensure at least two sole practitioners are represented on the Texas State Board of Accountancy.

Texas Representative Phil Stephenson, CPA, recently filed the two bills with the legislature in an effort to assist small practitioners in his state. Stephenson, who owns an accounting practice in Wharton, Texas, believes the state over‐regulates the practice of public accounting, particularly for small, hometown CPA practices. “Loosening this requirement will not harm the public’s interest,” he said.

The first of the two bills he introduced, H.B. 1756, would reduce the burden of participating in Texas’s peer review inspection program by removing compilation reports prepared for micro or small businesses from the state’s mandatory inspection program.

“The vast majority of micro and small businesses are locally owned and operated,” Stephenson pointed out. “CPAs who prepare reports for small businesses with fewer than 100 employees and under $6 million in revenue do not present as great a risk for the public as those who prepare reports for large national businesses.”

Texas Association of CPAs president John Furge supports Stephenson’s bill. “The typical small business has stakeholders who are intimately involved in that business,” Furge said in a statement. “The owners manage their own business. They are on‐site every day. There are no remote investors or pensions to protect. The banker who lends money to these businesses almost certainly holds a security interest on the business assets. The risk of an accounting failure is insignificant. Even if there were to be an accounting failure, the consequences would affect very few people. The burden of inspection is simply not justified.”

The American Institute of CPAs’ peer review program inspects financial reports issued by CPA firms to promote quality in the accounting and auditing services provided by AICPA members and their CPA firms. The peer review program, however, has not always met its quality control goal, Stephenson’s office pointed out, as in the case of the now defunct audit firm Arthur Andersen. For public company auditors, peer review has largely been supplanted by the Public Company Accounting Oversight Board’s inspection program. In addition, the AICPA program was not intended to be uniformly applied to all CPAs who prepare financial reports. CPA firms that prepare only compilation reports, for example, may join the AICPA without being subject to a mandatory inspection program. The Texas State Board of Accountancy, however, interprets the AICPA program as being mandatory for any Texas CPA who performs any attest work, regardless of the size of the entity about which a financial report is prepared.

New York State, in contrast, exempts unincorporated sole practitioner firms and firms with two or fewer CPAs from its mandatory inspection program. Stephenson’s proposed bill would exempt reports prepared for micro businesses, defined as those with fewer than 20 employees, and small businesses, defined as those that have fewer than 100 employees or less than $6 million in annual gross receipts, from the mandatory peer review program.

The board’s insistence that these small reports be peer‐reviewed has harmed the accountancy industry in Texas, according to Furge. He pointed out that the Texas State Board of Accountancy’s own statistics indicate that “55 percent of Texas CPA practice units have signed an affidavit stating they will no longer issue compilation reports. This is not good for the public.”

“These small businesses deserve access to the services of their own local, hometown CPA without having to navigate rules intended for national or large regional operations,” said Stephenson. “My bills help the local CPA.”

Not only that, Furge argued, but removing such reports from the peer review regime would help control costs for small businesses. “If you have fewer CPAs performing these services, inevitably, the cost of obtaining these services must rise,” he said.

The second bill introduced by Stephenson, H.B. 1757, would ensure sole practitioners are represented on the Texas State Board of Public Accountancy. The bill would require that at least two sole practitioner CPAs be appointed to the Texas State Board of Public Accountancy.

Furge believes that having a CPA in the legislature who actually practices accounting is important.
“Representative Stephenson understands the issues affecting local CPAs,” he said. “What affects the local CPA also affects local businesses.”

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